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As January effects go, that was some January – the best for the Dow since 1994, taking US indices to within touching distance of all time highs; the best for UK equity indices since 1989, up by over 6% in the month; and for good measure China’s Shanghai Composite rose by nearly 7% and Japan’s Topix by 9.4%.

After a decent 2012 and an excellent start to 2013, investors are left asking whether this is the real thing? This is a particularly pertinent question for those who have been holding cash, bonds, gold or any other ‘defensive’ asset in response to the debt crisis and now find themselves underweight or out of the equity rally.

The buy case for equities includes:

The corporate sector is by far the healthiest sector globally – balance sheets are stronger than they have ever been and profit shares of GDP are growing.

The weight of money is favourable – in January in the US, equity mutual and exchange-traded funds (ETFs) benefited from the largest inflow of cash since January 1996. This is a drop in the ocean given the cash piles invested in defensive assets during the crisis.

Monetary authorities in the developed world have expanded their balance sheets by mind-blowing amounts in the past four years – this helps put a floor to risk and may one day support economic activity and / or inflation.

The European Central Bank’s OMT ‘promise’ has reduced tail risk in the Euro zone.

US risk has been reduced by the January 1st ‘fiscal cliff’ tax agreement.

Relatively debt free, with large and growing populations and a large rising middle class, emerging markets are the new locomotives for global growth

There are little if any alternatives offering reasonable risk adjusted returns

In this background investor caution is being replaced by a new concern – that the biggest risk is not enough risk. After all, equity markets are a forward looking indicator; might they not be telling us that this could be the year that abundant, cheap money finally gives traction to economic recovery?

My emotional side demands that I jump on the bandwagon and buy more equities out of the 34% per cent of my SIPP portfolio currently held in cash and corporate/ emerging market bonds. However, my more thoughtful side cautions me not to get carried away by the momentum. After all:

Excessive public debt remains a headwind for growth in the US and across Europe.

President Obama and right wing Republicans are not in a conciliatory, bridge building mood over $1.2trillion across the board sequestration cuts due by March 1st. The Congressional Budget Office forecasts only 1.4% growth in 2013 if these cuts go through.

While banks in the West carry on rebuilding balance sheets, strengthening capital bases and removing troublesome loans, they will continue to block the explosive creation of cheap money by central banks from reaching the real economy.

The eurozone crisis is not over as policymakers have still not found a way of dealing with excessive debt and grow their economies at the same time.

The era of quantitative easing is coming to a close in the West as doubts grow over the prudence and effectiveness of further money printing. The ECB is already seeing its balance sheet reduce as LTRO money is repaid.

Currency wars are not a zero sum game. It steals growth from others and can reduce total global output by artificially diverting resources away from the most productive locations. The main loser currently is the eurozone, arguably the area that can least afford to lose this war.

So far my cautious side is winning. My only activity in January was to switch out of my holdings in the M&G UK Recovery equity fund . Tom Dobell (pictured) has run the fund since 2000 delivering good long-term returns and his fund, which is still a 'star pick' in Citywire Selection, has been a long time holding across my family portfolios. I would never judge a manager over one year, especially one with a good long term record. However, in the past three years the fund has delivered below par performance and now with more than £7 billion in assets under management (AUM), excess returns seem to have become harder to generate. I have sold out of all of my holdings.

Otherwise, I am considering trimming some of my corporate bond holdings given their strong performance. Markets analysts are saying that only coupon returns can be expected at current yield levels, with the risk that real losses could be incurred at some time once record low government bond yields start rising.

Also, if I can contain my emotional side, I may be tempted to sell into the equity rally should it continue in the short term. Only limited real alternatives prevents me from being more aggressive. However, I am looking at finding a way to participate in the recovery of the US housing market which I believe has turned after a number of years of clearing out sub-prime lending and the backlog of repossessions.

1. The uptick in equities is not anticipating a return to customary growth but is a consequence of rebalancing out of low-yielding fixed interest when all the pressures of inflation are to the upside of interest rates.

2. That leaves the burning question: if you sell out of the equity market because it's getting a bit high, where are you really going to put the money? Is US property the Next Big Thing, really? Interest rates must go higher there too....

I am similarly cautious given the recent rally. I've sold out of my U.S. trackers and re-invested in absolute return funds for now, given the paltry interest on cash and prospective losses on bonds, when interst rates rise.

Well, you lot stick to agonising over your investments in funds and whether you are sane (rational) or not. Every week, on average, I collect a dividend which I can always easily find an extremely worthwhile equity in which to boost my holding and further increase my equity income.

Tony, the funds I've switched are within my SL pension plan, so no opportunity for investing in individual shares there. I could transfer to a SIPP, but would incur about £10K of charges!!! With only 30 months to go, before it's charge free, I'm not about to transfer out yet.

So Absolute Return Fund (GARS) appeared the best option to limit any forthcoming downside.

Am somewhat sympathetic to an element of cautionary liquidation of equities. It is possible that liquidity washing around the system as a result of QE could still buoy up markets, but would represent a move into more speculative territory. If you want another bear point, how about the return to power of slimeball, Silvio Berlusconi, looking much less of a long shot than at the start of the Italian election campaign........

I'm almost fully invested in equities and a small amount of M & G corp bond fund.. I have reduced my holding in some defensive stock ( vodafone and Glaxo ) and increased in tobacco, other than that supermarkets look cheap and I do like good solid growth stocks in the 3-4 % dividend range. What else offers a yield? Property, perhaps but not very liquid is it.

thank you for the link- it is always good to be reminded of the other side of the story. The fact that the market is 'investment' led on the surface may appear to be an issue and certainly shouldn't be ignored. However, it should also not distract from value indicators such as level of house prices, affordability, availability of credit, inventory etc. All the stars are not perfectly aligned, but a number are coming together to say that this severely (in some regions) depressed market maybe on a decent recovery. Only inflation is the missing key driver, but inflationary expectations I believe are on the rise.

My problem is finding the right vehicle - I would like direct exposure to residential house prices, in particular in the key regional areas and in particular to single family homes. On my platform (HL) I have found either ETFs linked to non residential property or small cap shares linked to construction or construction supply or to mixed property development, or reits which give access to a rental stream. Would be interested if anyone has any ideas?

With farmland increasing in price, London property soaring and strong growth seen in the Pacific regions I have remained invested in Savills who must benefit from their eminence in these fields. Oil companies that pay a good dividend and are well established such as Dragon seem worth holding on to.

Otherwise I am wary of the situation in the U.S.where the debt problem has been fudged and so have cashed in 60% of my holdings (mainly because of an imminent house purchase). Gold has fallen; time to apply the Buffet advice?